Alternatives to Arbitration: Government ADR

The serious problems with binding mandatory arbitration (BMA) as a consumer dispute mechanism for financial services raises the question of "how can we do this better?" Any solution to financial services consumer dispute resolution must take into account four salient factors--(1) the disparity of sophistication between parties, (2) the disparity of resources between parties, (3) the repeat player interest of financial institutions, and (4) the frequently small amounts in controversy. Thus, litigation in court might do better at accounting for factor (3) than BMA, it does not deal will with factors (1), (2), and (4)--it is simply not practical for many consumers to litigate--court procedures make effective pro se representation difficult, time-consuming, and expensive, and the amounts in controversy are too small. Class actions can overcome these problems, but many disputes are not class action issues, and class actions have their own problematic dynamics. The fairness vs. practical trade-off between court and BMA isn't very satisfactory. Fortunately, we do not live in a binary world of public litigation vs. private ADR.

A very interesting new paper by Professor Daniel Schwarcz at the University of Minnesota School of Law raises another possibility: a public ADR system. Schwarcz's suggestion comes from his study of the United Kingdom's consumer dispute resolution system for insurance. In the UK the Financial Ombudsman Service (FOS) provides a dispute resolution mechanism for the entire insurance industry--it combines mediation, arbitration, and negotiation in a single scheme. The FOS (originally created by industry), is staffed primarily by non-attorneys and is separate from the insurance safety & soundness regulator, which helps guarantee its independence. And by being a public, rather than a private system, there are political checks and balances on its operations. Most important to note about the FOS, though, is that both consumers and industry are very happy with its operation.

There might well be features of the insurance dispute resolution process or specific to the United Kingdom that would make it difficult to import the system to the US or to apply to financial services disputes beyond insurance. And UK industry and consumer satisfaction with the system needs to be viewed in light of the alternative options available--how do the public litigation and private ADR options in the UK compare with those in the US?

Nonetheless, the thought of a financial services consumer dispute resolution system that grants rights that can actually be exercised and is fair and reasonably efficient is really intriguing. There might be solutions to consumer disputes in financial services other than the binary public litigation vs. private ADR divide. Of course, to the extent that the current ADR system is tilted in favor of repeat industry players, there is little incentive for the financial services industry to agree to a change (and the NAF would find itself with much less business), but any restructuring of financial services regulators should at least consider a government-run ADR system very carefully.